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Pondera FraudCast Blog

Pondera FraudCast

Welcome to the Pondera FraudCast, a weekly blog where we post information on fraud trends, lessons learned from client engagements, and observations from our investigators in the field. We hope you’ll check back often to stay current with our efforts to combat fraud, waste, and abuse in large government programs.

As the residents of Houston and surrounding areas continue to struggle with the devastation caused by Hurricane Harvey, history shows us that problems will continue long after the homes and businesses have been repaired. Every large natural disaster in this country follows the same pattern: destruction brought on by the disaster, followed by looting and price gouging, followed by huge amounts of fraud committed in the chase for assistance money.

In Texas, all three seem to be occurring at once. We’ve all seen the heartbreaking images and videos of families who have lost everything, unfortunately including those who lost their lives. We’ve also seen the inspiring stories of ordinary people that risk their lives to help a neighbor, a stranger, or a lost family pet.

Now, of course, the looting stories are beginning to circulate. In this case, it appears that law enforcement is doing all that it can to protect life and property, including announcing mandatory jail time for all thieves and burglars. However, the scammers are wasting no time setting up Facebook pages and sending out tweets with links to “relief organizations” that are actually designed to steal money from those who want to help.

I have no doubt that this fraud activity will only increase. Consider these examples following previous disasters:

- Dozens of people were convicted of using fraudulent psychiatric claims following 9/11 to steal up to $50,000 per year in Social Security disability payments.

- A New Jersey man was one of hundreds to receive relief funding (in his case $171,099) after falsely claiming his primary residence was a home damaged by Hurricane Sandy.

- An Alabama woman filed 28 claims for disaster assistance in 5 states following Hurricane Katrina.

Unfortunately, fraud thrives at the intersection of vulnerable populations and large amounts of money. And Hurricane Harvey creates this intersection by displacing so many families, by invoking a government response, and by tapping into the giving spirit of caring Americans.

Even more unfortunate is the fact that most of the fraud will go undetected and unprosecuted. Consider that the vast majority of the 22,000 cases of potential fraud passed to the government's Katrina task force were never prosecuted. And it is likely that FEMA collected less than 5% of the estimated billion dollars of fraud following the Hurricane. Only by increased enforcement and stricter sentencing will we be able to break this heinous pattern. And, to me at least, this is a pattern worth breaking.

The United States government and several states recently announced that they had settled a $465 million lawsuit against Mylan Inc., the maker of the EpiPen. The Department of Justice stated that Mylan had “knowingly” misidentified the EpiPens as generic to reduce the number of rebates it owed to state Medicaid programs. All drug manufacturers, including Mylan, must agree to the rebate program to be eligible to supply drugs through Medicaid.

Those of you that follow these types of stories may recall that Mylan was accused of price gouging last year when they increased the price for a 2-pack of EpiPens to $600—a 400% increase over 6 years. In addition to the price gouging accusations, Mylan was also forced to settle a separate Medicaid billing complaint in 2009.

EpiPens, for those of you unfamiliar with them, are self-injectable medical devices used to offset often life-threatening allergic reactions to bee stings, foods, and medications. As a parent of two EpiPen-carrying children, I can certainly attest to the importance of the device. I suppose that’s part of the reason Mylan felt comfortable increasing their prices so dramatically.

What really bothers me about this case is the fact that the settlement represents only 134% of the total amount of damages incurred. This 34% “penalty”, on top of what was already owed, isn’t much of a deterrent against improper billings, as evidenced by the fact that Mylan has been busted twice in just eight years. Consider that this is a company with over $11 billion of revenue in 2016. Also consider that Mylan’s stock price increased 1% on the news of the settlement, no doubt reflecting the fact that investors expected a larger settlement.

In my opinion, this settlement sends the wrong message to unscrupulous businesses. They may look at these numbers and figure that "intelligent cheating" could be quite profitable, encouraging them to simply write off lawsuits as a cost of doing business. This is despite the fact that they would be violating the federal False Claims Act which addresses contractors who defraud the government.

It has been an interesting few weeks for the Supplemental Nutrition Assistance Program (SNAP), formerly known as the Food Stamp program, with two high profile busts. Both cases illustrate common schemes used to defraud the SNAP program, which distributed over $70 billion in food-purchasing assistance last year to 44 million Americans.

In Georgia, two convenience store owners used stolen identities to apply for SNAP benefits which were then loaded onto EBT cards (similar to credit cards) and mailed to addresses they controlled. Once received, they swiped the cards at their own convenience stores and pocketed over $800,000 before being caught. The U.S. Attorney assigned to the case said, “They used the SNAP system as an ATM for their personal gain, diverting critical benefits that help those who need assistance in our communities.”

Then, in Delaware, seven case workers at the Department of Health and Social Services were indicted for creating 100 fake accounts and cashing $959,000 in benefits. After creating the accounts, the case workers had the EBT cards mailed to state service centers where they simply intercepted them and used the cards themselves. Their scheme was detected when a supervisor noticed incomplete application data for one of the cards.

The Georgia case illustrates just how easy it can be (at least for a time) to use stolen identities to defraud government programs. Even if the suspects hadn't owned the convenience stores, it would not have been difficult for them to find one that would pay them a discounted price in cash for their cards.

The Delaware case is one we commonly see across states and programs where unscrupulous employees use their knowledge of the system to defraud their own government agency. Large amounts of money, combined with loose supervision, often prove too tempting for those with questionable morals.

A quick check of the government’s fraud reporting website, paymentaccuracy.gov, reveals that improper payment rates for SNAP are still not posted because of reporting problems. I look forward to updated numbers when they are available because even a small number like the 3.2% reported rate for 2014 translates to over $2.2 billion per year in improper payments.

While I don’t often review books on this blog, I feel compelled to share my thoughts on American Kingpin by Nick Bilton, which chronicles the history of the Silk Road. For those who don’t know, the Silk Road was a market on the dark web that sold drugs, weapons, poisons, and even human body parts. By the time it was shut down in 2013, the site was selling over $1 billion per year.

The book offers fascinating insights into the dark web, the libertarian creator of the site, the investigators who worked to shut it down, and the political schisms that often make it possible to run sites like the Silk Road. And of course, the book has great relevance to the fraud detection business because fraudsters often acquire identities on the dark web to create fictitious businesses, file for tax refunds, and make fake unemployment insurance claims.

While American Kingpin ended with the shutdown of the Silk Road and the prosecutions of the major actors behind the market, it is important to note that similar sites continue to operate on the dark web. In fact, just days after I finished reading the book, Attorney General Jeff Sessions announced that the FBI had shut down a similar site 10 times the size of the Silk Road. At the time this site was shut down last month, it contained 369,000 listings for drugs, weapons, malware, chemicals, counterfeit items, and more.

This is a sobering reminder of the challenges facing law enforcement when dealing with anonymous browsers like TOR, the Bitcoin cryptocurrency, and international crime rings. The dark web is not going away. Neither is the demand for illicit items. It will be interesting to see how this “cat and mouse” games plays out over the coming years.

Another federal subsidy program is garnering congressional attention for large amounts of fraud, waste, and abuse. This time it’s the Lifeline program that provides discounts to low-income households for home or wireless telephone and broadband service. This program, which many Americans have likely never heard of, distributed $1.5 billion in subsidies to 12.3 million households in 2016.

The problem is that a recent study by the General Accounting Office (GAO) could not confirm the eligibility of a whopping 36% of program beneficiaries. The surprising part of this is that validating eligibility is as straightforward as checking an applicant’s enrollment form against a qualifying benefit program, such as Medicaid-- if someone has already been deemed eligible for Medicaid, then they are also eligible for Lifeline.

It is also troubling to note that the 84-page GAO report comes after a 2010 study that found problems with the program and led to a number of recommended reforms in 2012. Fast forward five years to today, and the problems persist.

Fraud in Lifeline stems from several factors common to most government programs: pressure to distribute timely benefits, a lack of effective data matching, and service providers (in this case telecommunications carriers) that benefit from a lack of control. The GAO actually called this last one out in their report when they explained that “companies may have financial incentives to enroll as many customers as possible” despite questionable eligibility.

None of the problems outlined in the report are particularly difficult to solve from a technical standpoint. But turf battles often lead to data sharing problems that lead to eligibility validation issues. And an unwillingness to enforce fraud reforms on businesses provides them with incentives to simply “look the other way”. Multiply this problem over the 2,300 federal subsidy programs operating today, and this adds up to a lot of money, all lost due to fraudulent, wasteful behavior.